Adam Smith's Lost Legacy

GavinK9 AT gmail DOT com

Sunday, September 30, 2007

Apologies to Stevie Joe, But He's Still Wrong About Adam Smith

A correspondent has taken me to task for what appears to be an apparent snub, or at least an act of discourtesy (unintentional I can assure all), in that I made a criticism of his views attributed to Adam Smith (2 July, Lost Legacy), to which he added a couple of comments and to which in return I did not respond. The correspondent in question was a Mr Stevie Joe, a self-proclaimed ‘genius’ who writes a Blog, Stevie Joe Parker’s guide to life (‘blazing a path to enlightenment, world peace, dependable government, and what not’) (here)

For some inexplicable reason, I did not respondat the time, for which I offer my unreserved apology, as I usually respond to all correspondents, without fear nor favour. As a lifetime-long educator, I suffer fools and geniuses in equal measure.

This came to my attention this very morning when checking emails and the trusty Google alert showed a piece referring to Adam Smith, and down came this one from Stevie Joe, which I did not recognise from before and which in equal measure perplexed me as I hadn’t clue the ‘good professor’ referred to me.

I copied it intact for study later and on seeing my house guests to the local rail station, en route to a day in Bordeaux, I returned from a long French lunch and read it again, this time noticing something familiar in one of its quotes and also that the ‘good professor’ was from Edinburgh. The author was referring to me! Temporarily in my French home (I return to Edinburgh next weekend), I quickly looked up the archives, found Stevie Joe’s earlier piece and the two unanswered comments. Quelle horreur!

That most modern economists have not actually read Adam Smith is sad, but a fact. That many of them attribute to Adam Smith that which he never said or wrote is a double sadness; it exposes them to criticism and exposes their ignorance to general disapprobation among those who have read Adam Smith.

Stevie Joe attempts to argue that this is analogous to the sayings of Jesus Christ, which came down from an oral not a written tradition, but, in general, probably bear some resemblance to what he actually preached. Maybe, maybe not. Brought up in the Scottish Presbyterian tradition and not the High Church of England or Rome, I reserve my opinions on the frugal simplicity of the Scotch churches compared to high and heavy rituals of the more prodigal of other churches among Christians.

However, the situation with Adam Smith is completely different. His works, Moral Sentiments, Wealth Of Nations, Lectures on Jurisprudence and various smaller essays and correspondence are available as they were written and edited by him. They are available at frugal prices intact and documented from Liberty Fund, Indianan, USA. While argument might be generated among biblical scholars about Christian sources, there can be none in the case of Adam Smith.

Anybody reading the archives of Lost Legacy would soon be aware that misattributions, made-up sources, and outright fiction is written about Adam Smith almost everyday somewhere in the world. So much so that several scholars, not just myself, demonstrate this sad fact by their detailed rebuttals of much of what modern economists claim about him and his Work. This has led some to differentiate a fictional figure, the Adam Smith created in Chicago, from the Adam Smith born in Kirkcaldy, Scotland, in 1723.

Of Alan Greenspan’s many qualities I have nothing to say, but his familiarity with the Adam Smith from Kirkcaldy is not among those qualities. The Adam Smith he talks about originated in Chicago in the 20th century. There are so many entries on Lost Legacy describing the errors in Chicago Smith that Stevie Joe can sample them. If Stevie Joe believes in Chicago Smith after reading them, there is little I can do to help him, though I am always willing to answer serious questions, should he have any.

Impressive Interview with Gregory Clark: a comment

Gregory Clark gives an interview (here) to the Intrepid Liberal Journal, 29 September, and explains the themes of his thesis from ‘A Farewell to Alms’ (Princeton University Press, 2007) in clear language for all. It is an impressive performance. I give a selected paragraph relating to Adam Smith below.

“The Industrial Revolution Unplugged: An Interview With Author Gregory Clark” by Intrepid Liberal Journal (originally posted in the Intrepid Liberal Journal as well as the Independent Bloggers Alliance, The Peace Tree and Worldwide Sawdust).

“ILJ: One element of your book I found ironic is your challenge to Adam Smith, considered the founding father of capitalism, who in 1776 published The Real Wealth of Nations. Smith postulated that the rule of tyrants and their institutions undermined incentive for productivity because the ruling class ultimately confiscated any wealth that was produced. You contend that pre-industrial England had plenty of incentive for producers, such as limited government and low taxes, yet prosperity still wasn't generated. Hence, Smith who is identified with the ethos of limited government actually postulated that the ruling class can positively or negatively influence economic policy with activist government. Why do you believe Adam Smith was wrong about that?

Clark: Well, since I've published the book I've come under criticism from intellectual historians. So, I think what I should be careful to identify it's the modern image we have of what Smith was about, rather than Smith himself. I'm not a historian of economic thought, so what I mainly want to emphasize is the message we've taken from Smith, the Smith we've constructed.

Smith is regarded as arguing that growth results from getting the correct economic incentives, which results from getting the right set of economic institutions. That's really an incredibly strong founding principal of modern economics, the idea that people really are at base the same everywhere. If you can only get the incentives correct, then economic growth will result. So, the book strongly takes issue with that.

I'm saying that economists have had to construct a false history of the world. They've had to imagine a pre-industrial past that is, you know, a cross of Brave Heart and Monty Python's Holy Grail and all the bad movies about medieval England. An image of rape, and pillage, disorder and violence, and serfs groaning under the weight of the lords emerged about medieval England.

My knowledge of medieval history, and this is one of the areas I've studied in detail, shows that picture is just unsustainable. If the World Bank was to now score medieval England against modern economies in any objective way, in terms of what are the incentives for production and for innovation, medieval England would score much more highly than somewhere like modern Sweden - which is a very rich and successful society. One way that shows up is, for example, in the average government tax rate for medieval England? It's one percent. In low tax America we're closer to forty percent, and in places like Sweden they're even close to sixty percent in terms of how they're taking from any extra earnings of the average wage earner.

Medieval England had absolute price stability. It had almost no government debt. It had very strong security of property. People who invested in land in local villages, who needed a ten percent return in order to make that investment, had absolute property security. We can see through the course of 500 years that lots of these land plots were transferred properly from one legal owner to another. They had a free market. And they had huge incentives. If you produced you ate, if you didn't produce you starved. For example we can see from the records that in 1316-17, in the last great famine that England experienced, poor people died and the rich lived (laughs).

ILJ: (Laughs)

Clark: You had every incentive to acquire assets in this world. Assets could be the difference between life and death. And yet this was still a world with very, very slow economic growth. Almost none. So one of the things the book is saying is look, modern economics in some sense is a cult. It's like pre-modern medicine, where you keep repeating these same ineffective treatments. They keep failing. In the book I provide lots of other instances where good economic institutions are not associated with economic growth. That's why I'm saying there has to be some other thing required, and what the book is arguing is that there really are important cultural processes that take place before you get modern economic growth. If we neglect that we're never going to understand the true nature of economic growth. And so we really need to move away from incentive explanations, and what the book is saying is that history is illuminating about this and we really need to know more about that history.”

And Clark concludes later (you must read it all to grasp his interesting thesis):

“And if we are going to solve the problem of poverty in sub-Saharan Africa, the solution is going to come in a very different form then the followers of Adam Smith are going to accept.”

CommentThe first thing to note is that Gregory Clark acknowledges that there is a separation between what Adam Smith of Kirkcaldy wrote and what ‘his followers’ claim for him today. See his contributions to the debate on A Farewell to Alms, posted on various dates since August on Bryan Caplan and Arnold Kling’s economic blog: EconLibrary Blog (here).

Having made this acknowledgement, I am not convinced that it is sufficient to do so in an Internet discussion whilst leaving the original assertion to the contrary as if the acknowledgement had not been made. Clark should undertake to make a correction in new editions of A Farewell to Alms and in discussions in other fora. The problem with modern ‘followers of Adam Smith’, all located in the neoclassical majority and all influential in economics policy programmes for developing countries, is that their presentation of Adam Smith’s ideas about growth is mainly wrong, and their growth theories are problematical (Solow, for instance).

Compressing a millennium into the odd century (14th?) when English agriculture was relatively peaceful is not representative of Western Europe after the fall of Rome in the 5th century. In fact there was peasants’ revolt, from memory, in 1381.

Let me state Adam Smith’s theory of growth in commercial society (the 4th Age of Mankind), if only to separate it from the modern ‘followers of Adam Smith’, rightly derided by Gregory Clark. I should have though that if Gregory Clark agrees that Adam Smith did not write what modern economists say he did, that he would be curious at least as to what he did write!

Gregory Clark queries why, with various institutional conditions all in positive mode in early Medieval England, there was no industrial revolution, or at least a breakout from the Malthusian trap? Gregory Clark points to the extent of trade relations (exports of wool, corn, etc.,) to continental Europe. But an industrial revolution (assuming such a term is valid) needs more than a market in a few specific commodities.

For a start it requires numerous extensive markets in many things, particularly manufactured (i.e., hand made) items, which also requires knowledge, know-how, and practised dexterity. This is before machines move from aids to augment physical labour to power-driven machines to replace labour. Manufacturing techniques in Europe often spread from theft, imitation and invited migration of artisans from one country to another (assisted by short-sighted religious motivated expulsions of hundreds of families, often to England, who brought with them necessary knowledge of manufacturing processes).

Smith regarded the trade between country and town in England as a crucial element in the continuing growth (partly a revival from Roman days) of commerce. Instrumental in this process was the slow and gradual accumulation of ‘capital stock’ in the hands of ‘merchants and manufacturers’. Smith sourced ‘stock’ in the savings out of immediate consumption way back in the age of hunters (the first age of mankind), where it was practised in primitive trade, as in his Just So story of the arrow maker trading with the hunter. Stock in that world was akin to a ‘grub stake’ and as societies developed into shepherding (the second age of mankind) and into farming (the third age of mankind) the accumulation of stock became less casual and more significant.

Herds required secure pasture land (to stop animals wandering back to nature) and crops required secure arable land (to stop animals, and landless humans, wandering in to deplete the crops. Both required ‘hired’ hands to nurse the stock into breeding and re-planting seed corn and to protect the integrity of property (see Wealth Of Nations, Book V, chapter ii). On this basis civil government was invented (where it failed, so did development); where it never started – in much of the world – populations remained in the first age, there being nothing inevitable about development.

From the end of the allodial era of warlords and vast landed proprietors, much of it uncultivated, from the 11th century, and during the feudal era, commerce slowly revived (the history of pedlars, etc.,) and with improved seagoing ships, foreign trade became an important element, including to move troops across the channel, and towns slowly grew from huts to more secure buildings. Waterways, rivers, coastal waters, were significant trade routes in which manufactured products were exchanged among settlements and with the rich proprietors in the country.

Literacy revived, initially from preservation in isolated monasteries, and then via the printing press into a wider, educated public. Universities were established (four in Scotland, two in England) and knowledge culture, based on Greek and Latin, spread.

Now place Smith’s model of growth into this mix. His theory of capital accumulation was long-term, slow and gradual, in progression. Those few with access to capital-stock could allocate some of it to immediate consumption, which above a minimal amount became prodigality. They could also allocate some of it to building machines (hand operated) to raise yields from the land (ploughs, shears, harnesses, secure fences, etc.,) in the form of fixed capital. To work the machines required labour who worked for wages at varying subsistence levels, depending on supply and demand. The machines required materials, raw or semi-processed. Fixed capital produced nothing unless circulating capital was applied to it (the purchase of labour and materials). Whereas fixed capital remained with its owner, circulating capital passed to others.

From the application of labour to work machines and repair them, output was produced and sold in markets. From the revenue received (market prices), the owner recovered outlays on the maintenance of labour and the purchase of materials. Any surplus above these outlays was profit on capital, from which the owner allocated a part to his immediate consumption, which could include items consumed over longer time periods, such as clothes, buildings, furniture, artefacts, trinkets, etc., and the other part to augment his capital stock. That proportion that augmented his capital stock constituted economic growth.

Across society, wealth was defined as the annual production of the ‘necessaries, conveniences, and amusements of life’. For a growing minority this was not a subsistence level of consumption. Per capita income statistics eliminate this most crucial component of development; hence I assert that the per capita statistics detailed by Gregory Clark are misleading as a measure of development. In the extreme, I have suggested that economic history of the last 10,000 years (and for long enough before that) the history of the poor is not the decisive factor in economic development: it is the history of the rich (all those above subsistence), plus the history of the politically powerful who diverted some proportion (from taxation, levies, duties, and oppression) of the annual production of wealth into stone built cities, infra-structure, cathedrals, harbours, canals, routes for trade, shipping, and the instruments of war.

The growing commercial exchange economy below a society, gradually accumulating capital stock (Smithian growth), with all the associated knowledge, literature, natural and moral philosophy, science, invention, and technologies, prepared the ground for the eventual invention and application of power-driven machinery that constituted what some call the industrial revolution.

I have suggested to Gregory Clark that he take sometime to study what Adam Smith actually wrote and not what modern economists (who may never have read him at all) say he wrote. This is not just of intellectual interest; he might find some of the answers to the conundrums he wrestles within A Farewell to Alms.

Saturday, September 29, 2007

Bryan Caplan on Invisible Hands and Selfish Businessmen

Bryan Caplan has a literate, pacy and thoughtful article on the Blog (October 2007): ReasonOnline (‘free minds and free markets’), which all readers should visit here: It’s called: “The Four Boneheaded Biases of Stupid Voters (and we’re all stupid voters)” and you will get a lot out of it. Also, those of you teaching undergraduates, or employees long out of school, should find it helpful for class discussions.

Among the excellent material there is one paragraph upon which I must comment, as this is Lost Legacy. It involves a simple reference to the ‘invisible hand’, much as most conventional economists present it today. The first two sentences quoted below are absolutely fine. It’s the last one I find problematical and out of place:

“Yet profits are not a handout but a quid pro quo: If you want to get rich, you have to do something people will pay for. Profits give incentives to reduce production costs, move resources from less-valued to more-valued industries, and dream up new products. This is the central lesson of The Wealth of Nations: The “invisible hand” quietly persuades selfish businessmen to serve the public good. For modern economists, these are truisms, yet teachers of economics keep quoting and requoting this passage. Why? Because Adam Smith’s thesis was counterintuitive to his contemporaries, and it remains counterintuitive today.”

CommentI agree that ‘For modern economists, these are truisms, yet teachers of economics keep quoting and requoting this passage’, which does not explain much, and linking it to Adam Smith and the Wealth Of Nations is an unfortunate error because it perpetuates a 20th-century myth promoted from within by neoclassical economists and now firmly embedded in the profession.

It is interesting that the metaphor of ‘an invisible hand’ is so beyond discussion by our best economists that Bryan Caplan can write the sentence: ‘The “invisible hand” quietly persuades selfish businessmen to serve the public good.’

Has he read what his sentence means: an invisible disembodied hand ‘quietly persuades’? Could he actually explain what this means, with reference to Wealth Of Nations? Is it a general principle of neoclassical economics that disembodied hands persuade ‘selfish business men to serve the common good’ (it certainly isn’t Smithian)? If they do, what exactly is the economic theory behind this persuasion? Or, to put it slightly differently, what does ‘an invisible hand’ explain that economics doesn’t explain without it?

That ‘For modern economists, these are truisms’ is a cause of regret. That they are linked to Adam Smith is doubly unfortunate. First, because it turns a simple metaphor for a phenomenon which Smith explains perfectly clearly before he uses the metaphor, a tolerably known and well-used 17th-18th–century literary device (that can be traced also relatively abundantly back to classical Greek and Roman times), and secondly, it introduces into the working of markets the notion of ‘invisible’ forces working to arrange optimum outcomes, of semi-magical, even divine, origin, when Smith and others made it clear from their analyses that markets evolved in the activities of humans without the assistance of ‘invisible gods’, or their disembodied body parts (see his ‘History of Astronomy' essay).

Wealth Of Nations discusses in great detail the working of markets from first principles (Book I) through to the accumulation of capital (Book II). Among these first principles were the propensity to truck, barter, and exchange; urge to self-betterment; the division of labour; extent of markets; theory of prices (natural and market prices; components of commodity prices); theory of growth; and productive and unproductive of labour.

Nowhere in 375 pages of the analysis and elaboration of these first principles, where he is covering the whole workings of the commercial economy, is there a mention, hint or allusion of an ‘invisible hand’ at work, and certainly nothing is said about ‘selfish businessmen’ being quietly persuaded ‘to serve the public good’.

Indeed, in these two books I have noted that there are 52 instances of where he specifically shows that the self-interests of certain individuals in society leads them to act against the interests of others and of the society they live and operate within. This Blog entry is not the place to list them, but I will do so in a separate entry shortly (they appear in my ms for my new book on Adam Smith).

Apart from any other circumstance, this suggests that Adam Smith did not regard the metaphor of ‘an invisible hand’ to be other than a metaphor for the argument he used on the single occasion when he used it. As a metaphor it was never one of his founding principles, otherwise it would have appeared in abundance in Books I and II; but it didn’t appear even once!

He uses the metaphor only once Wealth Of Nations, in Book IV, chapter ii on page 456. This is extraordinary for what has become a ‘truism’ of Smithian economics. So let’s look closer at the context. Chapter ii is about restraints on imports on goods that can be produced at home. Smith’s main argument is that they are unnecessary and when they are imposed they create a monopoly for domestic producers of the home market for formerly imported goods (higher prices). This diverts capital from where is would otherwise go, with no guarantees that it would be more beneficial than where it would go if allowed the freedom to do so.

Individuals seek the most advantageous employment of their capital, which necessarily is most advantageous for society; whatever their intentions. Individuals prefer their home market over distant markets because home markets have the advantage that his investments do not leave his sight (so to speak); he knows better with whom he transacts than foreigners at a distance; and he is more comfortable with the local legal protections and general justice than he is with foreign justice. This can be summarised as: the individual’s risk aversion is lower for domestic business than it is for foreign business.

By directing his capital locally he adds to domestic capital growth, which results in higher domestic growth than if he diverts some of all of his capital into foreign trade. Driven by his risk aversion, his preferences lead to higher domestic activity, and as the whole is the sum of its parts (by arithmetic), irrespective of his intentions (averting or lowering risk), the outcome is a public benefit in employment and capital turnover, and from free competition with foreign produced imports, prices per unit are lower than monopoly prices from laws preventing or restraining imports (raising real wages of the labouring poor).

After explaining all this, Smith sums up for readers (of which more in a moment) of his critique of mercantile political economy by using a metaphor:

‘By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.’ (WN IV.ii.9: p 456)

So the motives of security (risk aversion) and gain (profits) are frustrated by import restraints (mercantile political economic policy) and the result is higher domestic prices and the need to export capital, for higher compensatory profits to cover the greater risks of making gains in foreign trade.

Wealth Of Nations being a long, closely argued treatise on policy (not a general textbook of principles, such as Sir James Steuart’sPrinciples of Political Economy, 1767), it was written to persuade legislators and those who influenced them. Those who skipped the ‘technical arguments’ in Books I, II, and the historical argument in Book III, to read the direct critique of mercantile policies as practised by British governments, where certain counter-intuitive arguments against import controls (one of Bryan’s ‘bonehead biases’ and ‘stupid’ to boot) could be too difficult to grasp (but not difficult at all for modern trained economists), Smith slipped in a single metaphor for a complicated argument for those readers struggling with his analysis.

Nobody took much notice of the invisible hand in the 18th-century, few in the 19th century, and few in the early 20th century until the triumph of the neoclassical paradigm (Samuelson in particular, and the Chicago School), which turned it from a specific purpose metaphor in a general metaphor for how markets work, and, indeed, into a general ‘truism’. From this treatment by epigones, Smith’s original meaning was buried. The many occasions in which he refers to non-optimal behaviours (including import restraints!) is forgotten. The invisible hand became a mystical, magical and even divine rationalisation of the conduct of big business, perhaps an apology, for sub-optimal behaviours by corporations.

Am I alone in arguing this case? I hope not.

[If you are not already a readers of Bryan Caplan’s and Arnold Kling’s Econ Log Blog here visit it soon – it is among the best economist's blog on the Net]

A Misleading Quotation Exposes the Ignorance of the Quoter

Game of quotation swapping to show that Adam Smith was a) conservative, or b) a socialist, are relatively harmless. Some people even write entire books on the subject, or build propaganda careers out of it.

So Shawn Fremstad writing in the Blog, Inclusion (‘independent progressive new’) today has a teasing stab at the Heritage Foundation with a series:

‘Things Adam Smith Said that Would Get Him Fired From the Heritage Foundation’and gives an introduction: ‘Adam Smith, the intellectual father of free-market economics, is revered by conservatives, but he also said a lot of stuff that would get him bounced out of the Heritage Foundation or most other conservative think tanks.’

His example quotation is:

"Wherever there is great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few presupposes the indigence of the many."

CommentI feel no need to defend the Heritage Foundation; they are big enough to defend themselves. However, I am inclined to defend Adam Smith’s legacy from misuse of his Works from what appears to be a politically motivated purpose, which, of course, is Shawn Fremstad’s right in a free society. My purpose is purely to set the record straight.

Shawn extracts a sentence from important paragraphs and he does not identify the source of his quotation, other than to write Wealth Of Nations, a two volume work of nearly 1,000 pages (depending on the edition). Readers of his Blog, not familiar with Smith’s Works, would have to rely in his interpretation, and in doing so may get the wrong idea. It may also be the case that Shawn does not have Wealth Of Nations to hand an is relying on a thrid-hand quote.

For those interested, the reference is: WN V.i.b.2: pp 709-10.

In Book V, Smith discusses the origins of civil government and the duties of the ‘sovereign’ or the government in a constitutional monarchy (as Britain was in his day – and still is). I shall quote the reference in full because it illustrates what Adam Smith was writing about, which puts a different slant on what Shawn makes him imply:

“Among nations of hunters, as there is scarce any property, or at least none that exceeds the value of two or three days labour; so there is seldom any established magistrate or any regular administration of justice. Men who have no property can injure one another only in their persons or reputations. But when one man kills, wounds, beats, or defames another, though he to whom the injury is done suffers, he who does it receives no benefit. It is otherwise with the injuries to property. The benefit of the person who does the injury is often equal to the loss of him who suffers it. Envy, malice, or resentment, are the only passions which can prompt one man to injure another in his person or reputation. But the greater part of men are not very frequently under the influence of those passions; and the very worst of men are so only occasionally. As their gratification too, how agreeable soever it may be to certain characters, is not attended with any real or permanent advantage, it is in the greater part of men commonly restrained by prudential considerations. Men may live together in society with some tolerable degree of security, though there is no civil magistrate to protect them from the injustice of those passions. But avarice and ambition in the rich, in the poor the hatred of labour and the love of present ease and enjoyment, are the passions which prompt to invade property, passions much more steady in their operation, and much more universal in their influence. Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security. He is at all times surrounded by unknown enemies, whom, though he never provoked, he can never appease, and from whose injustice he can be protected only by the powerful arm of the civil magistrate continually held up to chastise it. The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days' labour, civil government is not so necessary.” [WN V.i.b.2: pp 709-10]

· The whole of Wealth Of Nations may be read on-line at the Adam Smith Institute web site: http://www.adamsmith.org/smith/won/won-index.html

I have restored some elementary punctuation to Smith’s original from the Glasgow Edition of The Wealth Of Nations, Oxford University Press. You can purchase astonishingly low-priced editions of all of Adam Smith’s Works from Liberty Fund, Indianna, via Amazon.

Smith is discussing the origin of civil government from hunter-gatherer societies (what Adam Smith called the ‘first age of mankind’, Lectures On Jurisprudence, 1762-63, pp 14-16). He was not discussing 21st century (or even post-18th century North America). He found the origins of justice in the invention of property and reported it as a moral philosopher, not a political commentator.

If Shawn has a different theory of the origins of justice – to protect the individuals natural rights against depredations on his person, rights and reputation and on his acquired rights in property – or if he imagines that the Heritage Society has a different theory of their origins – I would be interested in considering them.

Those hunting societies in Europe and the Near East 8,000 to 10,000 years ago, after the last ice-age, that formed small settled societies, developed civil governments among which problems they faced was who lived where in the settlements. This required the invention of the role of private property. Without such a concept they could never have developed shepherding (Adam Smith’s second age of mankind) to solve the elementary problem of who owned which deer, sheep, pigs or cattle, and they would never have gone on to develop agriculture (Adam Smith’s third age of mankind), from which, as they say, the rest is history.

Now there may be some (I’ve certainly met a few) who regret the long run consequences of that fateful decision of individuals to abandon relying on hunting towards the end of the ice-age and starting mankind, unknowingly and unintentionally, to create the recent history of mankind as we know it. There are even some still surviving who would welcome the end of property, though they wish to retain all the appurtenances of civilisation at the same time. I admire their self-sacrifice of the lives of billions of humans, including themselves, who would never have been born if the ragged survivors of the last ice-age had reverted to hunting as many did in the rest of the world and were found in the same state they were in when the descendants of the pastoral and farming tribes found them from the 15th to the 18th century.

I cannot speak with authority about what the hiring principles are of the Heritage Foundation (though I worry about the hiring principles of ‘Inclusion’ if Shawn Fremstad thinks it OK to fire people for the ideas they hold) but I am fairly sure that they are more familiar with Adam Smith’s Works than he credits them. The difference is that they have read the whole of the Work and not just selected quotations and that they understand the role of context in what an idea means.

Monday, September 24, 2007

More Myths About Adam Smith

Chandrabhan Prasad in the Daily Pioneer (New Delhi) writes:

“The final quarter of the 18th century was the launching pad for the industrial revolution. That phase witnessed battles between handlooms and powerlooms. The triumph of machine was facilitated by many factors, crucial being the intellectual umbrella hoisted by Adam Smith, and financial discipline administered by the London Stock Exchange.

Indisputably, as the earliest philosophical-mentor of capitalism, Smith in his book wrote about the socio-economic rational for a capitalistic order society. The London Stock Exchange accorded capital an institutional authority.

Thus, without Adam Smith and the London Stock Exchange, all discourses on the industrial revolution would be out of place. Without either of them, the machine on its own lacked any inbuilt vision. Self-mesmerised Luddites on the other hand, had their well thought of goals. They fought the machine with a purpose.”

CommentsThere is a great deal of media commentary on Adam Smith in the Indian media, much of it showing the corrupting intellectual power of the Chicago version of Adam Smith, a 20th century fable now dominant in campuses across the USA.

Chadrabhan Prasad is no exception. He also adds to these errors a number of historical statements of problematic value.

Let me hypothesise if only to separate Adam Smith’s contribution to 18th century discourse from the extravagant claims that if it had not been for his contributions the so-called ‘industrial revolution’ would somehow of ‘lacked any inbuilt vision’ (whatever that means!), or that, again somehow, Wealth Of Nations facilitated ‘The triumph of’ the machine’.

These claims are spurious. Machine innovation was quite separate from people reading Wealth Of Nations; it had not have an immediate affect on such matters.

Watt developed the improved steam engine in the 1760s without reading the unwritten Wealth Of Nations (not written until 1776). Even his improvements were made by the accidental circumstance that Glasgow’s trade guilds prohibited young Watt from working as an instrument maker, and he was appointed by Glasgow University to work as such on its equipment. Among his tasks, he was asked to repair a model Newcomen steam engine, which he did and became fascinated by its design and took three years to improve on it. The only role that Smith played in these fortuitous events was to be a member of the University Senate at the time.

None of the other inventors mentioned by Chadrabhan Prasad passed through Smith’s ambit of influence. It is unlikely that they were influenced by his ideas when they solved purely mechanical problems and applied them in a few workshops.

Wealth Of Nations was a polemic against macro-level political economy then practised by the British government and it was not for many decades that those policies were changed. The process of change that led to the ‘IR’ had been underway for many years before Smith’s ‘intellectual umbrella’ was in place.

Smith did not write his book ‘about the socio-economic rational for a capitalistic order society’. He did not use the word ‘capitalistic’ nor the word ‘capitalism’, the latter first used in English in 1854 and thereafter by Karl Marx.

Smith’s concern was with the ‘fourth age of man’, or ‘commercial society’ as distinguished from the third Age of man agriculture. Commerce grew out of agriculture when the output of farming and herding, sufficient for the entire population, was produced by half the available workforce, leaving a surplus available for the artefacts of civil society, including infra-structure, trade, ‘machines’ to augment (but not to replace) labour, the generation of knowledge and its dissemination, inventions, civil government and so on. This process got underway repeatedly across Europe and slowly and gradually created the conditions for the invention of machines that replaced labour, and lifted the division of labour and trade to levels that raised per capita incomes above subsistence.

Adam Smith studied and analysed commercial society before the 19th century; he did not invent capitalism, nor accelerate it and most of what happened would have happened if he had become a parish church minister or had died in childhood.

To lay the burden upon his legacy of being instrumental in what happened in the 19th century can only appeal to believers in the other myths invented about him from the falsified legacy of 20th century neoclassical economists.

Ancient Chinese Thinkers On Liberty

From: The American Spectator "The Case for Market Taoism" by James A. Dorn, vice president for academic affairs at Cato Institute (24 September}:

“Lao-tzu, thought to have been an older contemporary of Confucius, may have been the first libertarian. In the Tao Te Ching ("The Classic of the Way and Its Virtue"), he argued that if government followed the principle of wu-wei (non-intervention), social and economic harmony would naturally emerge and people would prosper.”

”The essence of Lao-tzu's liberal vision is stated concisely in Chapter 57 of his book: "The more restrictions and limitations there are, the more impoverished men will be....The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise [ruler]: Through my non-action, men are spontaneously transformed. Through my quiescence, men spontaneously become tranquil. Through my non-interfering, men spontaneously increase their wealth."

"That passage, written more than 2,000 years before Adam Smith's call for a "simple system of natural liberty," is a reminder that China's legacy is not the commands of Mao Zedong Thought but the freedom of Lao-tzu Thought.”

The corruption that plagues China today stems from too much, not too little, intervention. When people are free to choose within a system of just laws that protect life, liberty and property, social and economic harmony will occur naturally. Top-down planning cannot impose spontaneous order; it can only evolve from decentralized market processes.

Good government must be in harmony with each person's desire to prosper and to expand the range of choice. By emphasizing the principle of non-intervention, Lao-tzu recognized that when government leaves people alone, then, "without being ordered to do so, people become harmonious by themselves." He thus understood, at least implicitly, that central planning generates social disorder by destroying economic freedom. When coercion trumps consent as the chief organizing principle of society, the natural way of the Tao and its virtue (Te) will be lost.

Disorder arises when government oversteps its bounds -- when it overtaxes and denies people their natural right to be left alone to pursue their happiness, as long as they do not injure others. Lao-tzu saw taxes, not nature, as the primary cause of famine: "When men are deprived of food, it is because their kings [rulers] tax them too heavily." Likewise, he recognized that rulers could easily destroy the natural harmony people cherish by destroying their liberty: "When men are hard to govern, it is because their kings interfere with their lives."

Freedom requires some boundaries if it is to be socially beneficial and not lead to chaos. Lao-tzu understood the need for rules but, unlike later liberals, did not develop the ideas of private property and freedom of contract that underpin a market-liberal order.”

Comment

James Dorn develops the theme to circumstances in Mao's Communist China and it current more heavily controlled market regime, and you should Google The American Spectator and follow links to the current issue to read the full article (sorry, but this laptop is restricted in space and does not always pick up URLs).

With its two thousand years of literacy, China contains within its some surprisingly modern analysis of society and it would be surprising if such thoughts could not be found written down somewhere in Chinese.

I am reading a scholarly paper at present written by a Chinese academic economist on 'Adam Smith and Confucius' and it is most interesting, to say the least about it. I shall report on it in due course on Lost Legacy.

With John Dorn's piece, there is an encouraging trend in bringing Chinese contributions into western thinking. Another benefit of freedom of expression.

I commented on EconLog and I append my comments (on one aspect of Bryan Caplan’s critique) below:

“The Malthusian Trap is compelling but highly limited in what it explains. As production rises, per capita incomes rise above subsistence (itself slowly changing in content, as changing notions of subsistence take effect over long periods), which has the effect over generational time that more children survive to adulthood and reproduce, and continue the Malthusian ‘cycle’. Eventually, population increases reduces per capita income to subsistence, child mortality increases, and growth in population ceases, and occasionally reduces overall.

Gregory Clark documents the Malthusian Trap with data, showing that over millennia long periods, per capita incomes remained at subsistence (the calorific count) to around the year 1800, and concludes that before then, no economic growth was strong enough to overcome the recurring constancy of the Trap. After 1800 per capita incomes rose and continued rising for the first time in human history.

Clark’s central question is why only from 1800? What happened to locate what the discipline calls the ‘industrial revolution’ in England and not elsewhere in Europe, and, as an extension of that conundrum, why didn’t it happen in other countries and at other times in history (including some surely marginal candidates)?

Excluding institutional (widely defined) influences and qualitative growth in knowledge, this represents a challenge to current conventional thinking among economists and historians.

What does the Malthusian Trap argument leave out? In my view, it is too narrow a view of history. That the majority of a population remained on subsistence for 10,000 years, despite the agricultural ‘revolution’ – which ‘event’ that took several millennia – is not decisive.

The agricultural mode of subsistence (Adam Smith’s second ‘age of man’) did not do much better in subsistence terms, and perhaps did worse, pace Jared Diamond, than hunter-gathering, it did bring about definite changes that made it possible for an ‘industrial revolution’ (basically the invention and diffusion of power assisted machinery) to occur millennia later, which if humans had persisted with hunter-gathering only, they would not have ever industrialised, and nowhere did they create a mode of subsistence that did not require the entire population of the hunting-gathering band to produce the per capita subsistence of the entire population.

This change in economic roles created the inequality in per capita subsistence, power, and non-work roles for a minority and new work roles for what became ‘armed retainers’, servants and religious strata. It also created, or activated, the human ‘propensity to truck, barter, and exchange’, which led directly to divisions of labour in production and differential levels of per capita consumption (Adam Smith).

In the course of history, the ‘surplus’ of subsistence above that required for the producers of subsistence, net of the amount required for the per capita consumption of increases in population. It is not the constancy of the per capita consumption (an arithmetical result that hides the differential rates of consumption, and, tellingly, the subsistence of those ‘elites’, including producers of knowledge and innovators of technology) that is decisive for answering Gregory Clark’s conundrum. It is what the elite that controlled the modes of subsistence did with ‘their’ net surplus over long periods of time, which was derived from their ownership of property.

That is why I have argued that the history of what made modern commercial society possible is not a history of the labouring majority of the population; it is the history of the minority of elites. This not an ethically acceptable statement to some people who confuse their social preferences, admirable as they are (and which I share) for what drove history through all its diversions in waste, cruelty, rapine and vileness, memorialised in the detritus of past-failed civilisations, and the wanton cruelties of the elites.

So, we should examine what the elite, their retainers, innovators, philosophers and preservers of knowledge, artists, architects and infra-structure builders did during these millennia, and, crucially, what those who traded were doing in creating the foundations of the commercial society (Smith’s 4th age of man), from which in due course, given the concatenation of evolutionary processes and circumstances that brought about the new possibilities), created what eventually became Clark’s ‘1800’ and thereafter.”

Saturday, September 22, 2007

Why I Criticise Misattributions on the Invisible Hand

Correspondents suggest occasionally (politely) that I should ease up on my critiques of the many references made to the ‘invisible hand’, on the grounds that it is: a) a hopeless quest given the widespread belief that it was Adam Smith’s ‘theory’, even if its wasn’t; b) it is not all that important to the world as it stands; c) it looks obsessive, which is not good for one’s reputation; and d) why does it matter?

I have always replied to these comments, explaining my reasons, not least because this is Adam Smith’s Lost Legacy, not a hagiographic column to his memory, and that the intellectual case against interpretations of markets as somehow (never explained) ‘magic’, ‘beyond human understanding’, and, occasionally, proof of ‘divine’ intervention in human affairs, is as unscientific as you can get, and economists, who claim pretensions to a science and at the same time pander to popular misunderstandings, that exclusively emanate from Chicago deserve the treatment that they get from my posts here.

Does it make any difference? Probably, but not all the time. Some of the people whose misattributions I have criticised, reply and acknowledge their ‘errors’; some acknowledge their ‘errors’ but as brazenly declare they will continue with their attributions because that is what the modern profession has decided to do, and it’s now ‘irreversible’ (a strange stance for scholars); and the third group simply ignore the posts (out of courtesy I try to send them a copy if I can find an address).

However, in case anybody wonders if I am imagining the impact of the misattributions of ideas to Adam Smith that he didn’t have, here is an example from today’s selection, this one from an OpEd in the Bangordailynews.com (Me; USA):

“Daniel Callahan’s portrayal of Adam Smith’s "invisible hand" free market breakdown (BDN, Sept. 6) misses the mark. Adam Smith’s free market invisible hand is the result of thousands of free individual choices made in their own self-interest. These choices naturally flow to the most valued, efficient and highest-quality goods or services benefiting both the producer and the consumer, effectively raising our standard of living.

Daniel Callahan blames the problems of Ford and General Motors on failure of Smith’s "invisible hand" when, in fact, the "invisible hand" was working as it should as competitors produced vehicles that were more efficient and less expensive, taking market share away from them. Both vehicle manufacturers survived the competition by what Smith called the "home bias." There is always some local support for local products.

Adam Smith did not say that all self-interest was good, but in a free market desired goods are usually produced. Certainly Enron and WorldCom were not good due to criminal behavior. And the mortgage industries’ sub-prime woes are the consequences of home buyers taking on a low payment for the first year or five years, and hoping they can afford the later higher payment. "Those are flaws that can be corrected."Callahan recommends universal health care based on several European models which would solve our morality issue — the many who do not get needed care with our expensive, fragmented system. This type of reform would satisfy the egalitarian distribution of social welfare. I’m sure Adam Smith would not object, but he would probably recommend a high deductible (true insurance) for everyone so a free market below the deductible between the patient and the doctor would develop, allowing his "invisible hand" to eventually produce less expensive, high-quality care just as it does in all other industries where a free-market economy exists with minimal third party interference.

Some health care experts, like Dr. Dean Ornish, believe that 50 percent to 60 percent of health care is due to poor behavior. People paying for their own routine health care bills would provide a powerful incentive to change poor behavior, and use resources wisely.

I am sure Adam Smith, or any economist, could argue that health insurance, as structured, private and government both, has added a layer of injurious regulations and costs, preventing a free market between patient and doctor and, essentially, has committed a cardinal economic sin by allowing free access and unrestricted demand that would normally destroy a finite resource through over-exploitation. But because health care is not a finite resource, as the industry grows, it simply crowds out other uses of our limited resources resulting in a lower standard of living, squeezing forever the bottom half of the income ladder. Continuing a noneconomic system where it is in the self-interest of the patient and the health care provider alike to overuse resources is a model for a death spiral and no amount of tweaking by government policy makers will change this.

To produce high-quality, less-expensive needed care, health care needs to be put on a sound economical footing. Patients need to be empowered with a high deductible (true insurance) policy for everyone (subsidizing the lower income with cash health savings accounts), which will allow Adam Smiths free market "invisible hand" to work its magic.

CommentI have reproduced the OpEd in full so that you can get the full flavour of its arguments about Adam Smith and ‘his’ (actually it was a common metaphor in 18th century literature – plus in Shakespeare in 1605) invisible hand.

Note the last sentence: ‘which will allow Adam Smith’s free market ‘invisible hand’ to work its magic.’

The whole point about markets is that either side of the chains of connections among buyers and sellers, they do not need to know anything about what happens or might happen two or more links in any direction. That is not ‘magic’, nor divinely inspired. Because it works it is repeated. What doesn’t work is not repeated and over time is not replicable (the players run out of resources, just as a bird that does not look in the proper places for its food will run out of energy and not reproduce).

Of the argument about health-care finance I have no comments. Richard B. Abbott is billed as having 30-years experience in health care and he knows more about health-care provision in the US than I do. It’s not his health-care policies I am criticising; it’s his misuse of Adam Smith’s ideas that I am commenting upon.

If you read down today’s posts you will see arguments against Richard B. Abbott’s misunderstanding of Smith’s use the metaphor in Wealth Of Nations, hence I shall not repeat them here.

Belief in Invisible Hands Belittle Adam Smith's legacy

Mary Kissel (editor of The Wall Street Journal Asia's editorial page) in Opinion Journal of the Wall Street Journal, writes a nice piece on a bustling market in New Delhi. It is worth reading, except for the usual attributions to Adam Smith:

‘This, mind you, is a market that predates Smith himself. Built in 1650 by the Mughal emperor Shah Jahan's daughter, Jahanara, Chrandni Chowk covers several football fields' worth of space. The shopping conditions aren't attractive; at first glance, many of the crumbling buildings don't even look stable. It's the top-quality goods that draw the crowds. There's no government imposing order. And why should it? As Smith said, there's a "certain propensity" in human nature to "truck, barter and exchange one thing for another," so it's natural that a certain kind of system, guided by an "invisible hand," results. Chandni Chowk must be the perfect place to watch it at work.”

CommentWhat is with people who feel a need to mystify how markets work?

On the one hand we have neoclassical economists quantifying every variable they can measure (ignoring what they can’t) to prove that their fantasy creations rest in general equilibrium, even though nowhere in the real world are their assumed conditions realised or realisable; on the other hand, we have the same ‘scientists’ claiming that in the real world there is a invisible hand (or is it many invisible hands?), which like Santa Claus must get around the trillions of transactions a day, ‘guiding’ real markets in such a manner that the whole system ‘works’, even though nobody has ever explained how it, or they, does its or their jobs.

For people claiming to be scientists, they behave like people imbued with pagan superstition.

Yet markets work in the context of all the things that neoclassical equations ignore and do so whether the invisible hand is invisible because that is its nature or because it doesn’t exist, which is why it is invisible.

Adam Smith’s explanation from his detailed analysis of markets (Book I and II of Wealth Of Nations) is perfectly understandable without the equations and without belief in invisible hands, a metaphor he used only once for a different purpose in Book IV.

In his posthumous 1795 'Essay on Astronomy' (Essays of Philosophical Subjects, edited by W. P. D. Wightman, Oxford), Smith refers to the three experiences of surprise, wonder and admiration that we go through when we confront something we do not know about. Our first reaction is ‘surprise’ at something out of the ordinary or of which we have no knowledge; ‘wonder’ as we begin to develop ideas about it; and ‘admiration’ once we understand what it is and how it works. Understanding never replaces our admiration, even awe, at its beauty, much as we can know all about the refraction of light and still admire a rainbow as we did when we first saw one.

‘Pusillanimous superstition’ was Adam Smith’s expression at the reaction of our savage forebears to phenomenon they did not understand, which they put down to the actions of invisible gods who were beyond human understanding. This was his first of only three uses of the ‘invisible hand’ in this case of Jupiter (the Roman god Jove).

Having fully explained how markets work, and how scores of interconnections among different chains of supply co-ordinated themselves without mentioning human guidance nor invisible hands, nor gods nor divine spirits, and, in his terms, having moved on readers of Wealth Of Nations from pusillanimous superstition from their surprise and wonder that markets worked, Smith would be disappointed to note how modern neoclassical economists have re-introduced silly superstition in the form of misappropriating an invisible hand metaphor into a major principle of his economics.

That Nobel prize winners (Stigler, Hahn and Tobin) introduce their version of an ‘invisible hand’ (not Smith’s) into the working of markets is bad enough, but that they explicitly identify it as Adam Smith’s theory (their scholastic authority giving credence to what is sheer nonsense) is worse.

I do not expect Mary Kissel to distinguish between what Adam Smith wrote and what his epigones claim he wrote, so that she writes about the propensity to truck, barter, and exchange and claims that ‘it's natural that a certain kind of system, guided by an "invisible hand," results’, even though that is a travesty of Adam Smith’s thinking. She is only misusing a metaphor as many scholarly economists do every day.

Chrandri Chowk was built in 1650 and has operated ever since as a market place. It is not a demonstration of equilibrium in its transactions’; it is not evidence of invisible spirits at work; there is nothing magical about how it functions; and realising these truths does not diminish our admiration for such market places one iota.

Markets are in the behaviour sets of all humans and they operate in many aspects of human life that has little to do, if anything at all, with buying and selling items. Smith made these points throughout all of his Works, from his history of natural philosophy, his history of languages, his history of morals, ethics and the practices of social harmony and disharmony, in the daily persuasions of life, in negotiated transactions across human behaviours and, of course, in, but not exclusively tied to, commercial markets.

Invisible gods, and their hands, do not guide human activities. Such beliefs belittle Adam Smith’s legacy.

Greenspan is Not the Second Coming of Adam Smith

“Greenspan is the Adam Smith of our time. He believes in the "invisible hand" that guides free markets and leads to greater economic growth and wealth for those willing to take risks for the reward. The Marshall Plan after World War II was not nearly the stimulant to European recovery that were private, free market, he writes. Economies change through "creative destruction" of companies and industries that become obsolete.”

CommentIf Adam Smith believed that the invisible hand ‘guides free markets and leads to greater economic growth and wealth for those willing to take risks for reward’, it is remarkable that he never said so.

William Neikirk has bought the myth about the invisible hand being a central principle of Adam Smith’s. It wasn’t. It was a metaphor for something quite different in Book IV of Wealth Of Nations. His chapters on how markets function are confined to Book I and are remarkably clear without any mention of 'invisible hands' guiding anything.

Worse, his specific and only reference to ‘an invisible hand’ in Book IV, chapter 2, page 456, was about the reward to society of merchants who specifically were risk averse and unwilling to take ‘risks for reward’, in the case of them choosing to invest locally rather than abroad, where the risks were greater from long sea voyages, uncertain weathers, cheating inhabitants of distant countries and uncertain legal systems for seeking redress. (WN IV.ii.9: p 456)

Smith argued that because they were risk-averse (not risk seeking!) these merchants preferred to invest their scarce capitals locally and by doing so they increased the amount of capital locally, which in Smith’s growth model would increase local employment and add value to the use of raw materials, which in consequence would increase domestic capital and net growth.

This had nothing to do with markets nor anything remotely connected to ‘guiding them’, and if Alan Greenspan believed it was, then he had not read and understood Smith’s use of the metaphor of ‘an invisible hand’.

If, as William Neikirk alleges, Greenspan ‘believes’ that markets are ‘guided’ by an invisible hand, that is his privilege – he may also believe in fairies at the bottom of his garden for all it is relevant – but if he also believes that Adam Smith shared his fantasies, he is most decidedly mistaken.

Having clearly explained why governments do not need to impose import tariffs and why local merchants are prepared to invest locally from their risk aversion, he concludes that the sum of the parts (each merchant investing capital locally to make profits) will create a large ‘whole’, which follows a well-known arithmetical rule and not a mystical belief in disembodied body parts.

Greenspan most decidedly is not the ‘Adam Smith of our time’, nor is he Schumpeter’s ghost, whose quip about ‘the perennial gale of creative destruction’ is about all that most people remember Schumpeter for – and usually contract it, as demonstrated by William Neikirk in his review, to ‘creative destruction’.

Friday, September 21, 2007

Did Adam Smith 'Denounce' the Division Of Labour?

From Civilisation (fanatics centre), Civilisation IV: ‘Beyond the Sword’, a sort of gaming website with some interesting forums and occasional ‘off topic’ posting, (here) I came across this contribution from ‘Princeps’:

“While I've read some of Adam Smith's Wealth of nations, I haven't quite gotten to a good start.

But, apparently, in page 340 of book five, he writes that...

"In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible to become for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging..."

http://www.bibliomania.com/2/1/65/112/frameset.html

Basically, Adam Smith denounced division of labour (or its effects) rather harshly, which is quite strange given how he's worshipped. Maybe the mainstream intellects get sleepy even before reaching this part, I know I got bored trying to find it.”

Comment‘Princeps’ ‘got bored trying to find’ Adam Smith’s quotation. Unfortunately that is how the majority of people acquaint themselves with Adam Smith’s writings, including top tutors in economics.

Most do not read his books through and nor do they appreciate what each book was about in its context. This means that they miss out a great deal of what Smith was doing. It’s a bit like reading a novel, not having grasped the characters and their situations and not really being aware of where they are or what they are doing.

In Adam Smith’s day, workshops were not remotely like modern manufacturing processes. There was hardly any power driven machinery, excepting windmills, water mills, a few Necomen steam engines for pumping water out of coalmines. The bulk of ‘manufacturing’ was by hand labour, and such machines as existed ‘augmented’ labour and did not substitute for it.

The famous pin factory was a hand driven work processes (18 of them in his example) which reduced each man’s labour to small steps, thus raising their productivity. Instead of a few pins a day, their output was raised to thousands.

But the division of labour was far more extensive than the pin factory; a little further on in the chapter (WN I.i) you find Smith describing the manufacture of a common labourer’s woollen coat and all the elements that went together to produce this item, most of them disconnected in location, including overseas for dyes, and all of them constituting distinct markets for their products and the trades they employed. Raw wool required farmers and flocks of sheep, metal scissors from a forge, from ore in the ground, and so on. This is as much a part of the division of labour as the boys working in the pin factory.

Adam Smith regarded the division of labour as the driving force for economic development when people stopped doing everything for themselves (and doing without everything they could not make for themselves), which in ‘rude’ society meant they were in abject and permanent poverty, with life spans of fewer than 30 years. This is covered in the first few chapter of Book I of Wealth Of Nations. If you haven’t read it yourself, do so now on one of the many copies of Wealth Of Nations available free on the Internet (Google for it).

Princeps has jumped from Book I to Book V and taken his quotation from the latter without explaining what Smith was doing warning about the deleterious effects on labourers who only work at single tasks for their working lives.

In Book V, Adam Smith is talking about the need for Britain to invest in education, especially of the young who at that time were often exposed to only a few years at school (to age 8 years), or not taught at all (girls were taught at home, did not go to school and certainly did not go to university). In Scotland, where Smith lived, a system of parish schools had been introduced in the 17th century where, in every parish, schools were open to boys to learn arithmetic, writing and reading, and some Latin, which if they showed promise they could be sent to university at aged 14, irrespective of their family circumstances and lack of finance. Most labourers were literate to a low standard, but not so in England.

To set up a national (UK) education system of a ‘little school’ in every parish, to pay for the buildings and pay the teachers (who would teach every class together), would cost money and this could only come from the taxes on the rich (the majority of people were poor and on basic subsistence). Wealth Of Nations was written for the literate people, mostly rich, who influenced government, or were members of it. Government in 18th century Britain was based on a very small franchise (Smith did not have a vote).

Therefore, as part of his persuasion of readers to support a national education system, to which their taxes would pay, supplemented by small contributions from parents, excepting the indigent very poor who could not afford even a penny, he had to give his readers good reasons for doing so, if they were not persuaded on moral grounds.

For this reason he wrote the paragraph quoted, and others, to appeal to their political interests and concerns, specifically their fears of rebellion. Remember, there had been the Scotch rebellions of 1715 and 1745, wars with France (the seven-years war) and, coinciding with the publication of Wealth Of Nations (1776), the American rebellion, resulting in American Independence. Also, in the 1790s, the French revolution caused severe fright among British aristocrats, which highlighted Smith’s points.

He specifically draws attention to problems of ignorance made worse by single focus daily work, and the dangers of ignorant people being misled into rebellion by agitators. These were real fears of people among his readers (but not shared by him). He suggests that for a small amount these schools would educate children and enable them to resist misleading ideas. Hence, to make his case, he laid on the rhetoric pretty thickly in Book V.

Incidentally, once power-driven machinery was introduced in the 19th century, which replaced many tasks of labour, the process of reducing the number of pin factories and the labour employed in them progressed to the extent that by the 20th century, there were two pin factories in Britain instead of hundreds, and each machine operated by one person did all of the steps previously undertaken by 18 men, such that by today the world’s pin supplies are made in a handful of factories. But remember, many labourers made the pin machines via the division of labour.

Great News from Canberra for the History of Economics

Recently, the Australian Bureau of Statistics initated a move to transfer Economic History and the History of Economic Thought from the classification of Economics into a miscellaneous groupong including philosophy and Religion.

This was regarded by scholars in these fields as an appalling misjudgement on the part of ASB. Apart from any career implications such as in academic appointments, promotion, teaching, research grant awards and the recruitment of students (plus concerns about 'tenure', which was not a concern of mine having refused tenure during my professorial career on grounds that it is 'protectionist', as in the old Guild systems), there were serious concerns that the ASB proposal represented a complete misunderstanding by data processsors in a government statistical function of the intimate and integrated nature of economic history and the history of economic thought in the broader discipline of modern economics.

It would have separated what is presently modern neoclassical economics, with its largely mathematical content, from the rich theory of economics as it developed from the 18th century (and earlier), and which has recently turned the subject into the study off 'fairy stories' about purely abstract mathematica economies without any contact with the real world.

Advising countries on development on the assumption, say, of infinite velocity of the key variables, when in fact history shows that development is a far more complex, 'slow and gradual', as emphasised by Adam Smith, process that is closely connected to non-economic influences (history, culture, ideas, politics, and so on)that should be accounted for, and would have the results, and has the results, of costly programmes emanating from neoclassical advisors to such as the World Bank, IMF and the major aid donors among governments that have been prevalent since the mid-20th century, let alone the damage done to the candidate countries and their economies.

The campaign, led by the History of Economics Society, and in particular Sandra Peart, its current President (see her Blog: Adam Smith Lives!), and supported by other history of economics associations across the world, several of the Nobel Prize Winners in Economics, and many distinguished scholars working in mainstream economics, who still connect to the history of our subject (it's the next generation that we are concerned about), which Sandra Peart has documented in her excellent Blog, has had the effect that the Australian Bureau of Statistics in Canberra, Australia, has relented and re-considered its earlier proposals.

We should be grateful for their decision. Bureaucrats do no like changing their minds and when they do we should be encouraged. I believe the history of economic thought and economic history have emerged stronger a result and we should build on our relief from what would have been the beginning of the extinction of it, and the crippling of economics itself, if these proposals had gone forward.

Here is the message I received this morning from Glyn Pritchard, of ASB, in response to the letter of protest I wrote after being alerted to this problem by Sandra Peart of 'Adam Smith Lives!' Blog:

"Thank you for your submission to the Australian Standard ResearchClassification review.

Your concerns with regard to the proposed treatment of Economic History andHistory of Economic Thought have been formally noted by the review team,and your submission and interest together with others on this issue hasbeen taken into consideration. On the basis of the information received bythe review team, the proposal with regards to these research fields hasbeen revised. The revised proposal is to keep Economic History and Historyof Economic Thought within Economics. The revised proposal is based onextensive feedback on this issue and the core reasoning behind thisproposal is as follows:

the techniques used in Economic History research are identical to thoseused in other areas of applied economics- the subject matter ishistorical economic data;

the History of Economic Thought can be described as being primarilyconcerned with the development of economic theory.

The current thinking is therefore to align these categories with therespective sub-categories of applied and theoretic economics. I appreciateyour input to this process and the classification in its entirety is notdue to be finalised until November 2007. Publication of the newclassification is expected early in 2008.

I hope that this addresses your concerns and thank you again for yoursubmission. If you have any further concerns please contact Dr David Brett- david.brett@abs.gov.au .

ABS appreciates such feedback in informing its deliberations for thisreview.

Wednesday, September 19, 2007

Labour MP Quits Aussie Parliament Quoting Adam Smith

‘Valedictory’ speech by Carmen Lawrence MP, an occasional Webdiary columnist for much of Webdiary’s existence is published today in Webdiary (‘patron power’) an Australian Blog. It contains this paragraph:

“The contemporary position of many governments, including this one, is that Adam Smith’s ‘invisible hand’ should be allowed almost unfettered operation to allocate goods and services in our community, including health and education. What that view of the world fails to understand is that Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces. The marketplace, competition, efficiency—such concepts underestimate the necessary human dimension to our lives. We continue to allow this agenda to dominate our policies at the cost of our humanity, our inventiveness and equality in our society.”

CommentShe is of course referring to the Australian Government, of which, to put it mildly, she is a trenchant and relentless critic (as she is entitled to be in a free society). Of her political agenda for Australia I shall say nothing; that is the business of the voting citizens of Australia.

I am concerned with Adam Smith’s ideas. Carmen Lawrence notes correctly that “Adam Smith himself was a very strong proponent of the need for institutional controls and the insertion of humane values into the operation of the economy because he recognised the limitations of market forces”. However, she has added a twist on her attribution of human values to Adam Smith that is not quite correct.

Adam Smith ‘recognised the limitations of market forces’ in the sense that in 18th century Britain he didn’t think individuals or groups of individuals would risk their small capitals in large ventures that would not produce a return, which is actually the ‘market forces’ at work.

Bear in mind that failed ventures, from incorrect business decisions, were every bit as unwelcome to Smith as prodigality of revenues in unproductive consumption, because they detracted from the important role of productive labour in creating the net revenues for the growth of employment and the increase in wealth (the ‘necessaries, convenience, and amusements of life’).

Therefore, those ‘public works and public institutions’ he advised that were too large for individuals to undertake, but which were of benefit for a commercial society, such as roads, harbours, canals, and sanitation, and institutions such a education and health expenditures to combat ‘noxious diseases’ (leprosy, etc.,), should be financed by taxation (though not necessarily undertaken solely by public bodies, a point that is often forgotten).

In mid-18th century Britain, capital was scarce compared to 21st century Australia. The tax base was also fairly limited compared to today. Smith was at best sceptical of governments borrowing to fund wars, and the idea of social security spending was not agenda in his days. Governments since Smith’s time have borrowed money for much wider purposes than fighting wars and while Carmen Lawrence may be comfortable with her country not being engaged in any wars, she may not be so circumspect about borrowing much more money for her social agenda. The extent of borrowing and its purposes are a matter for the Australian electorate, which may not coincide with Carmen Lawrence’s preferred policies.

From denouncing those who make the ‘market’ the sole answer to all problems of government failures, she has to be careful in a rich society like Australia (it used to call itself the ‘lucky country’) that she does not conclude the government is the sole, or best, answer to what she believes are ‘market failures’.

That some people who attribute to Adam Smith the notion that everything should be decided by market forces, a view he did not express in Wealth Of Nations, while he did express on many occasions deep suspicions of governments influenced by ‘shop keepers’ and ‘merchants and manufacturers’. But neither was he comfortable with politicians and governments decided the minutia of what people should do with their capital and how they should decide on their preferences.

Also, he never expressed any notion that 'an invisible hand' operated nor should operate 'unfettered ... to allocate goods and services in our community'. In fact, the metaphor of the invisible hand did not refer to markets at all; it was about 'risk aversion' to investing abroad (WN IV.ii.9: p 456, and Lost Legacy posts passim).

He also warned against ‘men of system’ who, in their conceit, believed they knew what was good for everybody; who saw society as a giant chessboard with wooden prices on it called ‘people’, whom they believed they could move about by dictating their movements for their own version of what was good for them. But, alas, for their pretentions people have 'motions' of their own. He wrote this in Moral Sentiments (TMS VI.ii.2.16-18: pp 233-4), his book on humanity, morality and social harmony.

If Carmen Lawrence has not read Moral Sentiments, she might find it interesting for a truer perspective on Adam Smith’s philosophy. I do not think that Carmen, and others who espouse the same agenda, have a monopoly of the human virtues, neither do the modern conservative epigones have a monopoly of their claimed affinities to the moral philosophy and political economy of Adam Smith.

It is a safe bet that they haven’t read Adam Smith’s works, apart from isolated quotations, and as my memories of Australia include a fairly strong labourers’ predilection for gambling on horses, ‘tommo’s two-up’ and slot machines), I’ll chance a quid of two on such a bet.

Can Government Funded 'Enterprise' Agencies do Better than Markets?

I came across a new Blog on the block a few days ago and I am recommending that you take a look at it over a week or so. It describes itself: “The Lockesmith Blog" which 'hopes to play an important role in the growing resurgence of the scholarship of classical liberalism through the exploration of the principles of individualism, private property and the free market, the rule of law, and social toleration.”

Yes, that’s John Locke and Adam Smith, complete with their likenesses on the heading line.

“LockeSmithBlog” (from a group at Belmont University, USA) post a typical piece, “Bad Policy for an Entrepreneurial Economy” by Jeff Cornwall (18 Sept)

“America is in the midst of an entrepreneurial economic transformation the likes of which we have not seen in over 100 years. Over half of the GDP comes from businesses under 200 employees, and for the past twenty years these small companies have created 70-80% of all new jobs every year.”

Visit LockeSmith Blog for the rest of its first posts, and scroll down its first few here.

Have a look at Jeff Cornwall’s post on ‘Socialised Entrepreneurship’. I wonder what he would make of Scottish Enterprise, which has done something similar for nearly years (declaration of interest: I occasionally worked for Scottish Enterprise, original Socttish Development Agency, as a consultant and tutor on negotiation since 1980). The post certainly made me think about this issue and the role of such agencies.

I think the LockeSmith Blog is written in an authentic Smithian tradition (so far). I think the good folks at the Adam Smith Institute in London would be interested in it too.

Tuesday, September 18, 2007

$10,000 For a Script Idea, but is it Good Idea?

From National Association of Manufacturers (‘We are the millions of people who makes things in America’) 18 September: Carter Wood sets a challenge: “Any Pro-Business College Bloggers Out There?”:

America's Future Foundation, which supports development of young, free-market-minded leaders, is sponsoring a contest for the best college (graduate and undergraduate) blogger of a classical liberal persuasion. Award is $10,000. The focus is on young people who wish to be journalists or writers. Screenwriters, too? As we just noted, TV dramas sure need a shot of some scripts influenced by Adam Smith or John Locke (more than Grammy-winning Terry O'Quinn, we mean). Or Horatio Alger.”

CommentWell, here’s your chance if you’ve got in you! A drama in which an entrepreneur is not a sadistic, mean spirited, selfish, profiteer, of the kind we see almost nightly on tv.

Children are brought up on the steady diet of central-casting’s version of business. Profit is almost always spat out in tones of disgust.

Though I wonder what we’ll get instead of script writers working in Adam Smith’s ideas, or John Locke's. I’m not sure who Terry O’Quinn is, or for that matter who ‘Horatio Alger’ is either.

Whichever Adam Smith Alan Greenspan Now Rejects It Wasn't the Adam Smith Born in Kirkcaldy in 1723

‘The acolyte of Ayn Rand believed market capitalism was ordained to triumph in the 20th century because it spoke to human strivings in a way that collectivism couldn't. But when Newsweek editor Jon Meacham and I interviewed Greenspan last week and asked what he learned from writing his new memoir, “The Age of Turbulence”, he said that the experience made him appreciate that human nature is far more complex than what he learned about it from Adam Smith and The Fountainhead.”

Greenspan seems to argue that since the case for capitalism is so overwhelmingly rational, the opposition to it must surely stem from very deep-seated, immutable characteristics. “And that carries me to the general conclusion that if you're going to model an economy, you have to do far better in understanding how the unit of the economy functions—i.e., the human being.”

As he compiled the book, Greenspan lifted his eyes from spreadsheets and data sets long enough to notice certain universals in human behavior—beyond profit-seeking. “When you get to be my age you see teenagers who replicate each other generation after generation, and it's all crazy and idealistic in the same ways,” he said. Greenspan also recalled his discovery that people in all sorts of isolated societies smile, and that when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities: “These were societies that truly grew up without contact with the rest of the world.”

Looking to human nature also helped Greenspan solve a perplexing economic mystery. Over the last 150 years, it seems that the maximum productivity growth the economy could achieve over a long period of time was 3 percent annually—despite a series of productivity-enhancing innovations, from the steam engine to the Internet. His conclusion? “What ultimately looks to be the case is that's the pace at which human beings operate,” he said. People simply can't process new ideas more quickly. “The answer is that the human race, no matter how one defines it, is not smart enough to do better.”

CommentI have had occasion to comment on Alan Greenspan’s knowledge of Adam Smith before on Lost Legacy (see archives, 2005), which if what is reported is accurate, he does not seem to be acquainted with his Works to any degree.

His image of Adam Smith is firmly stuck in the Chicago model of Adam Smith, which has little acquaintance with the man from Kirkcaldy.

Of Ayn Rand, I only know what I read of her’s earlier in my youth, before I went to university to study economics, though I have all of her books on my bookshelf here in France (except one which Jim borrowed in 1958 and did not return). Her objectivist rationality model of selfishness has little in common with Adam Smith; more a coherent version of Bernard Mandeville.

May be Alan Greenspan confuses the two philosophers. Neoclassical economists have erected a complete mathematical structure on rationality which even a superficial glance across a café’s occupants ought to raise questions as to its generality to all humans.

Adam Smith on the other hand made a study of human behaviour in The Theory of Moral Sentiments, showing a far more complex set of behaviours among humans than the myth of rational maximisers.

That Greenspan concludes now that “you have to do far better in understanding how the unit of the economy functions—i.e., the human being”, is welcome (better a sinner that repenteth …), though for all his influence today it may be a trifle late to be effective. His interviewers reveal that he found that ‘when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities.’

If Greenspan had read Smith’s Lectures On Jurisprudence and Wealth Of Nations more closely (if he read either at all; the latter perhaps only for well-known quotes) he would have found that Smith wrote about the reports of travellers in North American (French and British) about the lives and habits of the inhabitants (the earlier invading migrants from Asia) and of his general conclusions that human nature (in all its richness, not rationality) within a known range, as exemplified in literature and history (Herodotus, Cicero, Shakespeare, and Machiavelli, and many more) was shared among and between the distance and present ages.

So, whatever Greenspan claims to have ‘learned about [human nature] from Adam Smith’ certainly did not come from the Adam Smith, born in Kirkcaldy in 1723, though it may have come from the mythical Adam Smith, whom George Stigler claimed ‘was alive and well in Chicago’ in 1976.

As for Fountainhead my memories of it included a range of characters, but not Ayn Rand’s heroes, who were anything but in the mould of rational maximisers, but who were more representative of the human nature he claims to have discovered lately. It wasn’t Adam Smith who misled him; he misled himself in becoming a convert to Ayn Rand, while wandering the street of Manhattan and not on a road to Damascas.

Smith understood the need to take into account the pace at which people move under their own motions, not as wooden chess pieces as the playthings of ‘men of system’ who ‘are wise in their own conceit’ (TMS VI.ii.2.16-18: pp 233-4), but as complex characters in their own rights. That is why he advised, many times in Wealth Of Nations, that philosophers should take account of the ‘slow and gradual’ pace of change, and not rush into things because they seem right at the time.

Modern economists, consulting their equations like ancient Romans consulting their astrologers and readers of the runes, issue proclamations, and worse, predictions, and forecasts, often not stopping to consider why they are so often wrong. Greenspan admits to realising the accuracy of forecasting in his profession has not been very successful.

There is a connection between those failures and his belief in rational mankind, integral as it is to neoclassical economics, yet if he had cared to look more closely at Adam Smith’s Works he would have found not just a similar wrestling with the facts of human nature, but also a determined habit of not predicting the future.

You learn more by looking backwards in history, recent and distant, than by pretending to have an ability to look forwards to what has not yet happened.

Monday, September 17, 2007

A Libertarian on Adam Smith

In the Blog: Colliding Softly (here) there is an article “On the Art of Writing and Science” (the author is not identified), much of which I would probably be sympathetic to, except for these two paragraphs:

“When Adam Smith wrote about the division of labor and how the individual actions of people doing essentially different things come together to create change in a unified direction as by “an invisible hand”, it made sense. In rural society, where most people were working on the family farm, dividing chores meant increasing efficiency. This is even more true for the industrialization, where the division of labor could increase productivity by enormous numbers.

But does this mean division of labor always makes for increased production? Certainly not. History proves only the fact that division of labor was more productive (or, maybe, less unproductive) than the immature market production processes available at that time.”

CommentThe author quotes from Murray Rothbard (whom I have criticised for his views on the division of labour and for muddling his reading of this chapter in Wealth Of Nations: see Lost Legacy archives for details), and I am, not impressed if the author regards Rothbard as a reliable source on Adam Smith.

As for ‘come together to create change in a unified direction as by “an invisible hand”, I am totally perplexed by what this part of the sentence means. Smith never mentioned ‘an invisible hand’ as a prime principle or even a part of his political economy.

If the metaphor of the invisible hand had been a principle it would have been appropriate to include a mention of it in Book I or Book II, even Book III. But it comes up in Book IV of Wealth Of Nations as a metaphor in a lonely paragraph that has no connection whatsoever with the division of labour, nor for that matter with the working of markets.

Joining in this manner to the division of labour would be read by thousands of readers, who have not, and probably will never, read Wealth Of Nations, who will conclude that Smith did mean what this paragraph implies he did. But the truth is he didn’t.

So why do libertarians perpetuate the myth that Adam Smith did have a theory, concept, principle, or belief in an invisible hand (when not accusing him of outright plagiarism or following Schumpeter's highly negative assessment of his works)?

I find the libertarians’ assessment of Adam Smith perplexing. Yet they can be so right on other things.